Assignment1_PGP14009

Section – A

Landscape of Financial Services

Financial services are the economic services that are provided by the finance industry.

It encompasses a wide range of businesses which manage money, including banks,

insurance companies, credit unions, investment funds, stock brokerages, real estate

funds etc. Thus, it includes all activities involved in the transformation of savings into

investment. A well-developed financial services industry is absolutely necessary to

mobilize the savings and to allocate them to various invest able channels and thereby

to promote industrial development in a country.

The financial services are broadly classified into four categories which are sub-divided

into further parts. Figure 1 shows the types of financial services that are present.

The figure above explains the fundamental flow of funds between the lender/savers

and the borrowers/spenders. The principal lenders or savers are households,

government etc. whereas the borrowers or spenders are business firms, government

etc. There are two methods by which the borrowers can get money from the lenders,

these are Direct and Indirect ways.

Direct Methods:

Tries to raise capital by issuing financial instruments, for e.g. bonds, securities,

derivatives etc.

Investment banks also help the borrowers to target the investors to get

monetary help

Indirect Methods:

Banks are most common indirect method by which borrowers can get the

money.

It is also cheaper as compared to the direct methods but it is more regulated.

Global Scenario

The recovery from the 2008-09 financial crisis has begun. The financial services firms

appear to be on the surer footing, with sustained but slow growth returning to many

sectors. The US economy is also recovering and the slowly and steadily the US

government is pulling out the money which was pumped into the economy under the

disguise of quantitative easing also known as QE.

According to the Deloitte report on the financial services, the financial services

industry is divided into eight major sectors. These are:

1. Alternative Investments

2. Banking

3. Capital Markets

4. Commercial Real Estate

5. Life and Annuity

6. Property and Casualty

7. Mutual Funds

8. Private Wealth

There are various new avenues coming up in the above mentioned sectors for the

financial services firms. For eg: In the banking sector, there are seven trends that are

available, which are balance sheet efficiency, payment transformation, compliance and

risk management, data management etc. Similarly, in the capital market, there are new

upcoming trends of risk management and risk culture, client value optimizations etc.

Challenges

First and foremost, the most important challenge that the financial services sector is

facing is to maintain a consistent revenue stream so that the problem of credit crunch

can be sorted out. This problem is faced by almost all the firms in the developed

economies especially United Kingdom.

The second challenge is to rebuild the trust and confidence of the consumers in the

market. Interest and foreign exchange rate manipulation and commodities price fixing

have continued to damage the reputation of banks and asset managers.

The third challenge faced in front of the companies is one which is beyond control, the

macro political scenario of the world. Upheaval in Crimea and the Middle East has led

to international condemnation and stiff sanctions against states such as Russia who

have previously been accepted participants in international trade. The ongoing

democratisation of former Soviet states and continuing instability in both the Middle

East and North Africa further complicate the picture.

The fourth challenge faced is the change in the culture of risk management and

governance. Long term behavioural change is now recognised as key to limiting

exposure to financial crime risks. Regulators have taken the lead, encouraging and in

some cases forcing firms to address underlying organisational culture and be more

transparent in their governance.

Future Scope

There are various upcoming disruptive innovations in the financial services in the

future. These are:

1. Payments: Mobile Payments, Streamlined Payments, Mobile money, peer

to peer transfer etc.

2. Insurance: Self-Driving Cars, 3rd Party Capital, Smarter cheaper sensors

etc.

3. Deposits and Lending: Mobile Banking, Virtual Banking, Banking as

platform (API) etc.

4. Capital Raising: Alternative Adjudication, Empowered Angel investors.

Indian Scenario

The US$ 28 billion Indian financial sector has grown at around 15 per cent and has

displayed stability for the last several years, even when other markets in the Asian

region were facing a crisis. This stability has come through the resilience that the In-

country system and the finance companies have built over these years. The financial

sector has kept pace with the growing needs of corporate and other borrowers.

Banks, capital market participants and insurers have developed a wide range of

products and services to suit varied customer requirements.

The Indian financial services sector is divided into four major segments which are

further classified into several different parts. These segments are:

1. Corporate and Merchant Banking: This includes corporate lending,

syndications, capital markets, venture capital etc.

2. Consumer and Commercial Banking: This includes retail and consumer

finance, mid-market commercial, lending, leasing etc.

3. Private Banking: This includes wealth management and trust management

4. Financial & Operational Services: It includes brokerage, securities and

trading, derivative and optional product, IT services.

Key Trends

Banking in India has transformed into technology intensive and customer

friendly model with a focus on convenience. The sector is set to witness the

emergence of financial supermarkets in the form of universal banks providing

a suite of services covering almost all the verticals.

The Indian capital markets have witnessed a transformation over the last

decade, leading India to be counted among the mature markets of the world.

Key progressive initiatives taken by the Indian market institutions has been

the depository and share dematerialization systems that have enhanced the

efficiency of the transaction cycle. Many new instruments have been

introduced in the markets, including index futures, index options, derivatives

and options and futures in select stocks.

According to a survey conducted by Thomson Financial and Prime Database,

India ranked as the third most active venture capital market in Asia Pacific at

the start of 20th century. There is an increased interest in India. The amount

has grown nearly twenty fold in the past five years.

Challenges

The financial services industry is in a period of transition globally. Regular market

shifts, fierce competition, and technological developments are ushering in

unprecedented changes in the global financial services industry. Organizations in this

highly competitive and increasingly regulated industry will especially need to focus

on making themselves more:

Adept to face increasing transaction volumes, regulation and the integration

of previously disparate global markets

Agile at identifying and managing risk

Optimized in both business & technology, operationally efficient

Financial professionals with knowledge of Business/Industry and technical

competence

To enhance their competitive advantage in this changed environment, financial

services institutions are increasingly harnessing senior executives with right

knowledge of business/ industry and technical competence, who can spearhead new

business initiatives with better IT Technologies to provide superior customer

offerings and streamline internal processes. Today's dynamic marketplace demands

that financial services sector emphasize on technologically advanced, feature-rich

solutions, that can operate in real-time and with the highest degree of precision and

reliability.

Section – B

An Investment Bank is a financial institution which acts as an intermediary between

the providers and users of capital. The providers of capital funds can be individuals,

pension funds, sovereign wealth funds etc. and the users of these funds can be

government, corporates and municipalities.

Chinese Wall

Strategic advisory

Securities Underwriting

Private Side Public Side

The Investment banks perform a variety of crucial functions in the financial markets:

1. Equity capital-raising

2. Debt capital-raising

3. Mergers & Acquisitions

4. Restructuring

5. Ratings

The main role of an investor banker is to do:

Client Relationship Management

o Ongoing dialogue on financial markets, industry developments, new products

o Long-term relationship as advisor to Senior Management and Boards

Idea Generation and Problem Solving

o Strategic Alternatives

o Capital Raising

o Optimizing Capital Structure

o Risk Management, Dividend Policy

Assessment of opportunities is the market

Users of

Capital

Investment

Banking

Research

Sales &

Trading Providers of

Capital

Career Trajectory

The career trajectory of an Investment Banker basically consists of five stages:

Generally, fresh undergraduates out of colleges joins the investment banks as Analyst

whereas MBA graduates joins the investment banks as Associates. It takes almost two

to three years for Analyst to get promoted to Associate. Associate and analyst works

closely. The associate checks and assigns work to the analyst. Sometimes there can be

the requirement of handholding in some tasks.

There are three factors which determines the career path of a candidate.

1. Graduation College: A college plays a very important role in the

development of a candidate. It more or less decides the pool of companies that

the candidate will be joining after his/her completion of the course. For eg:

Colleges belonging to Ivy League and other top B-Schools of the world assists

the candidate in joining firms like Goldman Sachs, Deutsche Bank, J.P. Morgan

etc. whereas tier-2 colleges will only be able to provide some boutique firms.

2. Firms that the candidate joins: It is the second factor that determines the

career path of a candidate. The growth in a Boutique firm is much faster than

compared with big firms like J.P. Morgan, Goldman Sachs etc. But at the same

time the exposure is much more in these too big to fail firms than in boutique

firms.

3. Capabilities of the candidate: According to me this is the most important

factor which decides where a candidate would be after ten or fifteen years. A

highly capable candidate can reach the position of Managing Director in any

firm whereas a candidate who is not very capable might just be able to make it

to the Vice President.

Analyst

Associate

Vice President

Director(Executive)

Managing Director

Section - C

Investment Banking is considered to be the one of the most demanding job in terms

of sheer hard work and skills. Everybody expects an Investment Banker to be well verse

in terms of knowledge and capabilities. The basic skills required in an Investment

Banker are:

• Strong communication skills (written and oral)

• Quantitative / technical skills

• Teamwork and leadership skills

• Motivation and strong work ethic

• Self-confidence and positive attitude

• Time management skills

• Personality (sense of humor, enthusiasm and ability to adapt to different

situations)

• Knowledge of firm and industry

• Ability to work well under pressure

• Creativity

But we would like to categorize these skills with some sort of framework which would

help us to clearly differentiate among these capabilities. In order to do so, we would be

using the Bloom’s Taxonomy.

Bloom's Taxonomy was created in 1956 under the leadership of educational

psychologist Dr Benjamin Bloom in order to promote higher forms of thinking in

education, such as analysing and evaluating concepts, processes, procedures, and

principles, rather than just remembering facts (rote learning). It is most often used

when designing educational, training, and learning processes. Benjamin Bloom gave

three domains of learning namely- Cognitive, Affective and Psychomotor. The

cognitive domain involves knowledge and the development of intellectual skills. This

includes the recall or recognition of specific facts, procedural patterns, and concepts

that serve in the development of intellectual abilities and skills. There are six major

categories of cognitive processes, starting from the simplest to the most complex which

are represented in the figure below.

1) Remembering: An Investment Banker should be able to recall or retrieve all

the previously learned information. He/she is expected to have knowledge

about different firms in different sectors. This means that he/she must have

sharp memory.

2) Understanding: After gathering all the information it is very important to

make sense out of that information, there comes the understanding aspect. An

Investment Banker must be able to comprehend and interpolate the

information that he has received. This required technical and comprehending

skills.

3) Applying: After remembering and understanding the information, it is very

important that the candidate must be able to apply it in a real life situation. All

the gathered knowledge and understanding goes for a toss if the candidate is

unable to apply his knowledge into a real life situation.

4) Analyzing: After applying the next category that comes is analyzing. An

Investment Banker is expected to be able to separate material or concepts into

component parts so that its organizational structure may be understood. He

must be able to distinguish between facts and inferences. This required good

analytical and critical reasoning skills.

5) Evaluating: This category involves making judgement about value of ideas or

materials. An Investment Banker is expected to evaluate the results after doing

the thorough analysis of any report or project. He is expected to make critical

judgements and also make other people understand the rationale behind his

decisions. This require the candidate to have strong communication skills,

quantitative skills and confidence in his capabilities.

6) Creating: This is the most complex category which only few people can

achieve. It requires strong understanding of each and every processes involved

in the domain of Investment Banking. All the Managing Director’s in a big shot

Investment Bank has this quality as common.

Challenges in Investment Banking

Investment Banking job is perceived as very high paying job but with high pay comes

different and difficult challenges every day. Some of these challenges are:

Long working hours

Need of continuous improvement

Need to face strong personalities (demanding seniors)

High stress or pressure environment

Sometimes involves a lot of travelling

Less personal time

Section – D

Dream Job in Investment Banking

My dream job in the Investment Banking sector would be to assist the corporations in

the mergers and acquisitions. The most fundamental skill required for M&A is to know

how the businesses are valuated. One has to be very careful while assisting

corporations in the M&A deals as it can be make or break for the company. Once a

corporation acquires another company or merges with another organisations there is

no looking back. There have been various examples where M&A have been failures

whereas there has been M&A where companies have grown leaps and bounds after it.

Secondly, one has to be adept at various financial modelling software and needs to

have good presentation and communication skills.

The mentioned skills can be acquired by understanding what are financial services,

how businesses are evaluated, reading a lot about different sectors of market and

making one sector as your forte. Financial Modelling and presentations skills can be

honed by practicing on excel and power point respectively.

The institute would help me in gaining the knowledge about financial services and

business valuation whereas honing my financial modelling and presentation and

communication skills is something that I have been working on myself.